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Guidebook for Risk Assessment in Public Private Partnerships

December 2013

 

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1 Introduction

1.1 This guidebook is part of the FHWA P3 Toolkit

The Federal Highway Administration's (FHWA) Office of Innovative Program Delivery (OIPD) has developed a P3 Toolkit comprising tools and guidance documents to assist in educating public sector policymakers, legislative and executive staff, and transportation professionals. The P3 Toolkit forms the basis of a broader P3 capacity-building program that includes a curriculum of P3 courses and webinars. The P3 Toolkit addresses both Federal requirements related to P3s and four key phases in P3 implementation: (1) Legislation and Policy Development; (2) Planning and Evaluation; (3) Procurement; and (4) Monitoring and Oversight.

1.2 The purpose of this guidebook is to provide an advanced understanding of risk assessment

The FHWA's P3 Toolkit includes the Guidebook for Value for Money Assessment for Public-Private Partnerships. Risk assessment is one of the inputs for the quantitative analysis in the Value for Money assessment as seen in Figure 1-1. This guidebook is therefore best read in succession to the Value for Money Assessment guidebook.

Figure 1-1 . Value for Money Assessment Tool

Figure 1-1 . Value for Money Assessment Tool

FHWA's P3 Toolkit includes both the Risk Assessment for Public-Private Partnerships: A Primer, and the Risk Assessment Tool and User Manual 1. The primer provides an introduction to risk assessment and risk allocation in the context of Public-Private Partnerships (P3) and Value for Money analysis (VfM). The Risk Assessment Tool is a Microsoft Excel tool that demonstrates how a risk assessment can be conducted. These tools are intended for educational purposes. The evaluation of a specific project requires setting up a project-specific risk assessment.

This guidebook is intended to be a detailed follow-on to the primer, and as such covers more challenging and advanced risk assessment topics. It is designed to enhance the overall understanding of the relationship between risk assessment and Value for Money analysis and to provide hands on guidance for practitioners in the field. In addition to this guidebook for Risk Assessment, a guidebook on Value for Money analysis, which is a follow-on to the FHWA primer on VfM assessment has been developed. The VfM guidebook offers guidance on how to conduct an assessment of conventional versus P3-delivery options. The risk assessment described in this guidebook is an input to the VfM assessment.

To make this guidebook as useful as possible to practitioners, it provides an advanced understanding of the practical applications for assessing and allocating project life cycle risks, and addresses the numerous challenges faced when doing so.

1.3 Risk assessment is crucial in preparing, procuring, and implementing P3 projects

Well-performed risk assessment is absolutely essential to the successful implementation of P3 projects. A thorough understanding of risk allocation and risk valuation leads to a more accurate VfM analysis, providing decision makers with better information to determine and optimize project delivery alternatives. Proper risk assessment also improves the structuring of innovative P3 contracts because risk allocation can be optimized, allowing those risks to be transferred to (or retained by) the party best suited to handle the risks.

The fact that risk assessment is crucial in all project phases does not mean that the assessment should be equally detailed throughout all project phases. In the early phases a high-level risk assessment will suffice, whereas in latter phases-for example when a P3 transaction is being structured or when doing a VfM assessment on the basis of real P3 bids-a much more detailed analysis may be performed.

Professional risk assessment has the additional benefit of improving communication and public outreach, since P3 projects may involve public relations challenges. A proper risk allocation and valuation improves the credibility of the P3 analysis and enhances the ability of stakeholders to communicate the pros and cons of a chosen solution to the public at large.

1.4 This guidebook focuses on the financial perspective, not the social perspective

The scope of this guidebook is from the financial perspective of a government entity and not the perspective of the entire economy. This perspective mainly affects the valuation section, because the valuation is not based on benefit-cost methods from the perspective of society, but on financial pricing techniques from the perspective of the public agency or taxpayer.

The reason for this approach is that the primary application of risk assessment in the context of the P3 toolkit is in financial feasibility assessment and VfM assessment. As with most VfM assessment methodologies, the starting point is the financial calculation. A government agency may decide to separately assess socio-economic factors. The financial VfM calculation may be complemented by relevant non-financial and socioeconomic considerations such as those considered in a benefit-cost analysis (BCA).

1.5 This guidebook is developed for transportation staff involved in P3 projects

The intended audience for this material includes the staff at FHWA, individual state departments of transportation, executive branch departments and agencies considering P3s, metropolitan planning organizations, and other transportation management agencies that are considering a P3 approach or are preparing, procuring, and implementing a P3 project. With this guidebook in hand, the user will gain the ability to:

  • Better explain the concepts of risk assessment and allocation
  • Coordinate and monitor a team of specialized advisors
  • Perform state-of-the-art risk assessment

1.6 The structure of this guidebook mirrors the steps performed in an actual risk assessment

The guidebook is organized to take the user through the different stages of a risk assessment in the same manner that any practitioner would expect to perform it from start to finish. While the ultimate goal of this assessment is to incorporate the results in the VfM assessment, this guidebook guides the reader in performing a full risk assessment. Some of the risks identified and valued will not result in a marked difference in the VfM assessment between different delivery methods. However, performing a full risk assessment can ensure that no risks are forgotten.

To improve the understanding of the concepts introduced in this guidebook, a hypothetical example is provided that highlights some of the unique challenges facing practitioners in real life. This example is featured throughout the guidebook and is introduced below.

A hypothetical example: Introduction to the I-13 Project

The State of Pennorado has decided to expand a highway, Interstate 13 (the Project). The Project is in the early stages in which its feasibility is being assessed, and different delivery methods are being compared in a Value for Money (VfM) assessment. Ms. Brown (the Project manager) and Mr. Regan (the risk manager) work with the Pennorado Department of Transportation (PDOT) on the Project team that is responsible for the planning, contracting, and implementation of this project. Currently the team is performing a risk assessment as part of the VfM assessment. The question is whether the Project should be contracted in the conventional way-design, bid, build (DBB)-or if it should be contracted in a P3 arrangement. The P3 contract may include either a toll concession, or exclude toll revenues and utilize availability payments only.

Project history

The search for a regional transportation solution to the increased traffic congestion and accidents on I-13 started in 2003. In addition to the congestion and accidents, increased freight traffic and transportation to and from the regional airport need to be addressed. An investment study conducted in 2004 concluded that even with the large planned investments in transit in the region, the expansion of the I-13 corridor was the only alternative that can address the transportation needs outlined above. A Final Environmental Impact Statement (FEIS) was issued in January 2009.

Project description

The Project is located on I-13, an existing four-lane highway connecting two metropolitan areas. The highway corridor is 78 miles long, with major arterials intersecting the roadway. Within the Project area, the I-13 corridor consists of a number of communities, including eight cities and five counties. Upon completion, I-13 will be eight lanes wide (four in each direction), four of which will be managed lanes (two in each direction). Carpools, buses, hybrid vehicles with permits, and motorcycles will use the lanes toll-free. The Project also includes bus rapid transit (BRT) service improvements.

Project objectives

The objectives of the proposed I-13 corridor improvements are:

  • Support local and regional comprehensive planning and development
  • Maintain the efficiency of existing roadways in the immediate vicinity of the airport terminals
  • Relieve local congestion
  • Serve airport freight operations, reduce travel times between airport and freight destinations
  • Improve regional mobility and safety
  • Design Project in an environmentally responsible manner
  • Complete the expansion on time to prevent relocation of an airline due to congestion issues
  • Provide cost-effective alternatives and solutions.
Project status
  • Design: The preliminary design is 80% complete.
  • Planning and Environmental Approvals: The environmental impact statement (EIS) and record of decision (ROD) were issued in 2009. Tolling was not included in the original I-13 National Environmental Policy Act (NEPA) documentation; additional analysis would be required to reflect the impacts from managed lanes.
  • Right of Way Acquisition: 95 of the 223 parcels needed for the Project have been purchased. The Project assumes that the full right-of-way corridor will be purchased, though construction may be phased. 
  • Toll authorization: Legislative toll authorization would be required and is not available yet.
  • Support: Most cities and all counties, the Port Authority, and the freight community support the Project.
  • Investment cost estimates: Recent estimates for overall design and construction costs are $865 M (1/1/2014).

Footnotes

1. All tools can be found at http://www.fhwa.dot.gov/ipd/p3/toolkit/.

 

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